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Upstream gifting can be a powerful estate tax tool

When an individual leaves behind a considerable estate, the assets that exceed the current $5.43 million exemption are subject to federal estate taxes. A great deal of effort goes into reducing an individual or couple's estate in order to avoid paying excessive taxes. One often overlooked tool in attaining that goal is known as "upstream gifting." This practice not only reduces estate tax, but also saves Tennessee heirs from paying high capital gains tax.

When a homeowner sells a piece of property, he or she is taxed on the difference between the property's cost basis, which is the amount originally paid for the property, and the final sales price. Capital gains taxes can run as high as 33 percent. However, when a party inherits a piece of property, he or she is given an updated cost basis that reflects the property's current market value. This "stepped up" basis means a lower tax bill when the time comes to sell the property.

So, families who are interested in reducing their taxable estate may consider gifting real estate to their loved ones. Giving a piece of property to an older relative, or gifting the property "upstream" within the family, gives the beneficiary a valuable asset at a reduced cost basis. When that loved one passes on, the property can then be passed back down to a child or grandchild, who will also inherit a newly "stepped up" cost basis.

Properly implemented, upstream gifting can benefit multiple generations. This approach also keeps a piece of property in a Tennessee family, which is important to many. There are a number of ways to reduce estate taxes, but upstream gifting has the additional benefit of reducing capital gains taxes for those who will inherit the property in the future.  

Source:, "5 ways to protect your estate from capital gains taxes", John O. McManus, Dec. 25, 2015

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